State ex rel. Empire District Electric Co. v. Public Service Commission

MAUS, Judge,

dissenting.

I agree with the analysis and statement of the issue in this case as developed by Judge Crow. That issue was succinctly recognized in the following question asked of and answer given by the staff accountant of the Public Service Commission who sponsored the schedule that deducted the deferred taxes in question from Empire’s rate base:

Q. Then I would also assume that you would agree with the statement that if rates in ’63 to ’73 were based on flow-through, then accumulated deferred taxes appearing on company’s books for these years are not properly deducted from rate base?
A. That’s right.

However, because of my view of the evidence, I cannot agree with the result reached by the principal opinion or the concurring opinion. I respectfully dissent.

The limited scope of judicial review of the Report and Order of the Commission has been stated. However, the evidence relevant to the issue presented is undisputed. The Commission did not find any of that evidence unworthy of belief. See Wilson v. Labor & Indus. Rel. Com’n, 573 S.W.2d 118 (Mo.App.1978). The undisputed evidence may not be arbitrarily disregarded by the Commission. Mo. Church of Scientology v. State Tax Comm., 560 S.W.2d 837 (Mo. banc 1977), cert. denied, 439 U.S. 803, 99 S.Ct. 57, 58 L.Ed.2d 95 (1978). The question is whether or not from the undisputed evidence the Commission could reasonably find that the rates in force during 1963-1973 were not based upon the flow-through of accelerated depreciation.

The Commission deducted the deferred income taxes in question from the rate base upon the premise of two findings. The first finding is the absence of records or documents that expressly and specifically show the rates for 1963-1973 were based upon flow-through. In that respect the Commission said, “If this question cannot be answered from the Company’s books and there are no reports and orders to look to, the Commission must agree with the Staff that this is a very ‘cold trail’ and the Commission therefore adopts the Staff’s position. ” (emphasis added).

It may be assumed “the Company’s books” referred to are the corporate accounting records of Empire showing income and expense and a balance sheet. There is nothing in the record before the Commission or this court to establish that those books could be expected to reflect the calculations upon which the 1963 and subsequent rate schedules were based. The testimony of independent C.P.A. Wilson tends to establish that those books could not be expected to reflect those calculations. Both Empire and the Commission acknowledged the absence of work papers to explain or support those schedules. The record does not establish that either Empire or the Commission could be expected to preserve the work papers for the 1963-1973 rate schedules. In these circumstances, the absence of documentation of the formulation of those rate schedules should not be considered to establish that accelerated depreciation was not in those years accorded flow-through treatment for rate making purposes.

The Report and Order in question also states that Empire believed that its Missouri rates had always been based upon normalization and “[t]he. Commission in this instance is greatly persuaded by the company’s prior practice.”

The application in this case was filed July 30, 1982. Because those preparing that application believed Empire had always normalized for rate making, the rate base initially proposed did not include deferred tax reserves for the period in question. In November, 1982, in connection with a proceeding in another state, an independent C.P.A. reviewed Empire’s treatment of deferred income taxes and rates prior to 1974. As he testified, from his examination of the relevant evidence, it was his opinion that for the period in question accelerated depreciation had been accorded flow-through treatment for rate making. The proposed rate base was amended to add the deferred tax reserves for that period.

*638The initial mistaken belief of Empire’s representatives that it had always normalized for rate making was apparently based upon two facts. First, after 1956, by virtue of Report and Order No. 13,376, Empire was permitted, for corporate bookkeeping purposes only, to normalize these tax consequences of accelerated depreciation. This would include establishing and keeping a record of deferred tax reserves. Further, also by virtue of Report and Order No. 17,816, from 1973 to the date of the present application Empire did normalize for rate making purposes. However, also by Report and Order No. 13,723, it affirmatively appears that Empire’s prior practice during the years 1958 to 1963 was flow-through for rate making. That was acknowledged by staff in this case. This practice should be equally persuasive. Under these circumstances, I do not construe the initial error in the preparation of the application to demonstrate that during 1963-1973 accelerated depreciation was not accorded flow-through treatment for rate making purposes.

I agree with the trial court that the only reasonable inference from the evidence is that for rate making purposes for 1963-1973 accelerated depreciation was accorded flow-through treatment. Each facet of the salient evidence provides such an inference.

The first such facet is the history of the Commission’s recognition of accelerated depreciation. In 1956, the Commission authorized “normalization for bookkeeping purposes only.” This results in a clear inference flow-through was required for rate making. That requirement is clearly established by the Report and Order approving Empire’s rate schedule in 1958. By that Report and Order, the Commission added such deferred income taxes to Empire’s adjusted net operating income. Thereby, Empire’s rates approved in 1958 were based upon flow-through.

Second is the fact that by 1958 the Commission had established a firm policy of requiring flow-through treatment for rate making purposes by utilities. This is demonstrated by the following language:

The Staff of the Commission has recently been instructed by the Commission to delete such expenses from operating income statements in rate proceedings, therefore, the adjusted net operating income for Missouri last shown above should be increased by $83,882.37.

Re: The Empire District Electric Company, 22 PUR 3d 399, 406, 7 Mo.P.S.C. (N.S.) 491, 500, Case No. 13,723 (1958) (emphasis added). It is particularly significant that the instructions to the staff of the Commission were not limited to Empire’s application under consideration in that case but to “rate proceedings.” The consistent application of this instruction by the staff is demonstrated by Reports and Orders approving rates of other public utilities in three cases. Re: Kansas City Power & Light Company, 8 Mo.P.S.C. (N.S.) 214, Case No. 13,822 (1958); Re: Missouri Power & Light Company, 7 Mo.P.S.C. (N.S.) 449, Case No. 13,721 (1957); Re: Joplin Water Works Company, 7 Mo.P.S.C. (N.S.) 375, Case No. 13,592 (1957). The Commission’s accountant, heretofore referred to, testified that he had no knowledge of a Report and Order during the period in question which approved normalization for rate making purposes.

The third facet is the Commission’s own recognition of its policy and practice. This policy and practice is demonstrated in Kansas City Power & Light Company, Case No. 16,803, 15 Mo.P.S.C. (N.S.) 71 (1970). The application in that case sought a rate increase. It was filed on July 28, 1969. It was the first general filing by the utility for an increase in rates since June 1, 1954. In the interim, the utility twice reduced rates, once in 1963 and again in 1965. In case No. 16,803, AEC, an intervenor, contended there should be deducted from the utility’s rate base $17,669,442 “representing certain alleged deferrals for income taxes (accelerated amortization, liberalized depreciation, investment tax credit).” In denying that contention, the Commission declared:

The Company’s treatment of the reserve for accelerated amortization is in *639accordance with orders entered by this Commission in Cases Nos. 12,498 (Union Electric Company) and 12,735 (Kansas City Power & Light Company), in both of which this Commission held that the balance in the reserve for deferred income taxes as a result of accelerated amortization should not constitute an item of deduction from plant in determining the net rate base in any rate proceeding. AEC acknowledges that its proposed deduction from the rate base of $8,737,650 as accumulated deferred taxes due to liberalized depreciation should not be made if the Company has been regulated for rate-making purposes on a flow-through basis. Neither the Staff nor the Company proposed any such deduction. The Commission has consistently regulated the Company on a flow-through basis as is stated in its order in Case No. 16,592 (Kansas City Power & Light Company). The weight of the credible evidence is against deduction of the aforesaid from the rate base.

Re: Kansas City Power & Light Co., Case No. 16,803, 15 Mo.P.S.C. (N.S.) 71, 76 (1970) (emphasis added). Apparently the 1963 and 1965 rate reductions by Kansas City Power & Light were accomplished in the same manner as the interim rate reductions by Empire. The Report and Order in Case No. 16,803 does not state the work papers supporting the 1963 and 1965 rate reductions were before the Commission. In the absence of such a statement, it seems unlikely they were. If they were not, the Report and Order in Case No. 16,803 accords favorable consideration to Kansas City Power & Light which was denied to Empire in this case. In all events, the Report and Order in Case No. 16,803 is clear evidence of the consistent application of the policy of the Commission requiring flow-through treatment of accelerated depreciation for rate making.

The fourth facet is the structure of the interim rate reductions by Empire. Those rate reductions were a revision of rates to result in a reduction in income of a stated amount. For example, the 1963 Revised Rate Schedules were designed to result in a reduction of income in the amount of $300,-000. This was done by the reduction of some, but not all rates. It seems very unlikely some rates based on flow-through would remain the same if the interim rate schedules were based upon normalization.

Fifth is the fact the interim rate schedules proposed by Empire were not the subject of a regulatory hearing. They were permitted to go into effect without suspension and without a report and order. In view of the firmly announced and consistently enforced policy of the Commission, the only reasonable conclusion is that those interim schedules conformed to the policy of flow-through treatment of accelerated depreciation.

The sixth such facet is a letter from the Commission to Empire. In 1969 the federal Tax Reform Act became law. If that Act did not in fact do so, at least Empire believed one of the provisions of that Act required regulatory agencies, such as the Commission, for rate making purposes, to normalize tax timing differences associated with liberalized depreciation if the utility was to continue to do so for tax purposes. As a result of that belief, by letter Empire requested that the Commission acknowledge that it would in the future permit Empire to base its rates upon normalization. On December 17, 1970, the Commission responded by its letter which in part stated: “Pursuant to the provision of the Tax Reform Act of 1969, you are authorized to normalize the differentials resulting therefrom for accounting purposes, for ratemaking purposes, or for any other purpose before this Commission with respect to plant placed in service on or after January 1, 1970.” (emphasis added). The fact Empire requested this acknowledgment is persuasive evidence that from 1963 to 1970, its rates had been based upon flow-through. The fact the Commission authorized normalization with respect to plant placed in service on or after January 1, 1970, rather than merely approving the continuation of a practice is virtually conclusive evidence that Empire’s rates had been based upon flow-through.

*640The force of these facets of evidence considered together causes the conclusion of the Commission to be contrary to the only reasonable inference from the evidence. I would affirm the judgment of the trial court reversing the Report and Order in question in part and remanding the matter to the Commission for further action not inconsistent with the judgment of the trial court and this opinion.